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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K/A

Amendment No. 1

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

For the fiscal year ended December 31, 2010

Or

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

For the transition period from            to           

Commission file number 000-31973

Beacon Power Corporation

(Exact name of registrant as specified in its charter)

(978) 694-9121

(Registrant’s telephone number, including area code)

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

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

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

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

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

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer or a “smaller reporting company” per  rule 12b-2 of the Exchange Act.

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

As of June 30, 2010 the market value of the voting and non-voting common stock of the registrant held by non-affiliates of the registrant was $62,328,940. In determining the market value of non-affiliated voting stock, shares of the registrant’s common stock beneficially owned by each executive officer, director and any known person to be the beneficial owner of more than 20% of the registrant’s voting stock have been excluded. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

The number of shares of the Registrant’s common stock, par value $.01 per share, outstanding as of April 27, 2011 was 25,607,547.

DOCUMENTS INCORPORATED BY REFERENCE

None.

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EXPLANATORY NOTE

This Amendment No. 1 on Form 10-K/A amends our Annual Report on Form 10-K for the year ended December 31, 2010, as filed with Securities and Exchange Commission on March 16, 2011, to include the information required by Part III of Form 10-K.  The information required by Items 10 — 14 of Part III is no longer being incorporated by reference to the Proxy Statement related to the Company’s 2011 Annual Meeting of Shareholders.  As required by Rule 12b—15 under the Securities Exchange Act of 1934, new certifications of our principal executive officer and principal financial officer are being filed as exhibits to this Amendment No. 1 on Form 10-K/A.  Except as described above, no other changes have been made to the Annual Report as originally filed. This amendment is not intended to update any other information presented in the Annual Report as originally filed.

Explanatory Note Regarding Share Amounts:

All share amounts and per share prices in this Annual Report on Form 10-K/A have been retroactively adjusted to reflect the effect of our reverse stock split, on a one-for-ten basis, effective February 25, 2011, unless otherwise indicated.

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PART III

Item 10.  Directors, Executive Officers and Corporate Governance

Members of the Board of Directors

Each of the following individuals presently serves on our Board of Directors.  The Securities and Exchange Commission’s rules require us to discuss briefly the specific experience, qualifications, attributes, or skills that led the Board to conclude that each director or nominee for director should serve on our Board of Directors. We have provided this discussion in a separate paragraph immediately below the biographical information provided for each director.

As you read the disclosure, please keep the following points in mind:  First, any specific qualification, attribute or skill that is attributed to one director should not necessarily imply that other directors do not possess that qualification, attribute or skill. Second, this disclosure does not impose on the director any duties, obligations or liability that are greater than the duties, obligations, and liability imposed on each other member of the Board.

Because the discussion of the specific experience, qualifications, attributes or skills of a director is to be made each year in light of the Company’s business and structure at that time, the content of this discussion may change for one or more directors in future years.

F. William Capp, age 62 (director since 2001)

Mr. Capp has served as our President, Chief Executive Officer and Board member since December 1, 2001 when he joined the Company.  Mr. Capp received a Bachelor of Science in Aeronautical Engineering from Purdue University, a Master of Business Administration and a Masters Degree in Mechanical Engineering from the University of Michigan.

The Company believes that Mr. Capp’s business expertise as Chief Executive Officer, including his extensive knowledge of the day-to-day operations of the Company and the issues that it faces, together with his engineering background and his manufacturing and operations experience, give him the qualifications and skills to serve as a Director.

Daniel E. Kletter, age 72 (director since October 2006)

Mr. Kletter is an independent consultant with more than 29 years of operating management, acquisition and director experience.  From 1999 to 2001 he was with ING-BARINGS/ABN-AMRO, where he was Managing Director in the Industrial Manufacturing and Technology Group.  Mr. Kletter serves on the Board of Directors of Power Curbers, Inc.  Mr. Kletter received a Bachelor of Science in Mechanical Engineering from the University of Notre Dame, and a Masters Degree in Business Administration from Northwestern University.

The Company believes that Mr. Kletter’s manufacturing and operations experience, engineering and international business background, and past service as a director on other company and association boards give him the qualifications and skills to serve as a Director.

Virgil G. Rose, age 65 (director since January 2007)

Chairman of the Board of Directors since August 2009

Mr. Rose has been an independent consultant providing advisory services that include working with the United States Department of Energy, California Energy Commission, California ISO, Bonneville Power Authority, National Labs, and numerous west coast utilities since 2004.  From 2001 to 2004, Mr. Rose was Senior Vice President and Director of Energy Delivery and Management at Nexant, an international energy industry consulting company. Mr. Rose has 43 years of experience in the electric utility industry in various consulting, engineering, system operation, and management capacities, including 27 years with Pacific Gas &

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Electric (PG&E), where he served as Senior Vice President of Electric Supply.  Mr. Rose received a Bachelor of Science in Electrical Engineering from Fresno State University, a Master of Science in Electrical Engineering from Santa Clara University, and has completed the Advanced Management Program at Harvard University.

The Company believes that Mr. Rose’s experience in utilities, familiarity with the regulatory environment of the electric industry, engineering background, and leadership abilities give him the qualifications and skills to serve as a Director and as Chairman of the Board of Directors.

Jack P. Smith, age 62 (director since 2001)

Mr. Smith is Chairman, Director and co-owner of Silversmith Inc., a producer of natural gas well metering and automated data reporting systems.  Mr. Smith co-founded Silversmith Inc. in 2003.  Prior to his current engagement with Silversmith, Mr. Smith was President and CEO of Holland Neway International, a leading producer of commercial vehicle suspensions and brake systems.  Mr. Smith also serves on the Board of Directors of Bissell Corporation in Grand Rapids, Michigan, SRAM Corporation in Chicago and Weasler Engineering in Wisconsin.  He is also a member of the Executive Council of American Securities, a private equity firm.  He is a Trustee of Grand Valley State University Foundation.  Mr. Smith received a Bachelor of Science and Masters Degree in Mechanical Engineering and a Masters Degree in Business Administration from the University of Michigan.

The Company believes that Mr. Smith’s entrepreneurial background, manufacturing and engineering experience and leadership abilities give him the qualifications and skills to serve as a Director.

Edward A. Weihman, age 62 (director since 2007)

Mr. Weihman is currently President of Kirkwood, Weihman & Co., LLC, a consulting firm serving the oil and gas industry.  He was a Managing Director at Dresdner Kleinwort and a predecessor firm, Wasserstein Perella, from 1995 to 2006, where he was engaged in the mergers and acquisitions business for the firm’s natural Resources and Utility clients.  Mr. Weihman received a Bachelor of Arts degree from Williams College and a Masters Degree in Business Administration from Columbia University.

The Company believes that Mr. Weihman’s financial expertise, particularly in the energy industry, and M&A background, gives him the qualifications and skills to serve as a Director.

Executive Officers

The names, ages, current positions and principal occupations during the last five years of our current executive officers are described below:

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F. William Capp

Mr. Capp’s background and business experience is noted above under ‘‘Members of the Board of Directors.’’

Matthew L. Lazarewicz

Mr. Lazarewicz has served as our Vice President of Engineering since February 1999, and was named our Chief Technical Officer in September of 2001. Mr. Lazarewicz is a Registered Professional Engineer in the Commonwealth of Massachusetts and received both Bachelor’s and Master’s Degrees in Mechanical Engineering from the Massachusetts Institute of Technology. Mr. Lazarewicz also completed his Master’s Degree in Management at the Massachusetts Institute of Technology Sloan School of Management.

James M. Spiezio

Mr. Spiezio joined our Company in May 2000. He has served as Vice President of Finance, Chief Financial Officer and Treasurer since July 2000, Secretary since March 2001, and was our Corporate Controller from May 2000 to July 2000. He has over twenty-seven years of diversified manufacturing and financial management experience. Mr. Spiezio is a graduate of the Indiana University School of Business.

Judith Judson

Ms. Judson joined our Company in January 2008 as Director of Regulatory and Market Affairs. She was appointed as Vice President, Asset Management and Market Development in April 2010. Prior to joining Beacon Power, Ms. Judson worked as a consultant to businesses in the energy sector from April 2007 through January 2008, served as a Commissioner and Chairman of the Massachusetts Department of Telecommunications and Energy from 2005 through April 2007.  Ms. Judson received a Bachelor of Science in Mechanical Engineering from Kettering University and a Master of Business Administration from Harvard Business School.

Board Leadership Structure

In August 2009, the Board of Directors formally appointed a Chairman of the Board, to recognize the differences between the roles of Chief Executive Officer and of Chairman of the Board. The CEO articulates management’s view of the Company’s strategic direction and provides day-to-day leadership, while the Chairman of the Board provides guidance to the CEO, sets the agenda for Board meetings and presides over meetings of the full Board. Our Board is comprised of five directors, four of whom are independent directors. As discussed below, we have four standing Board committees, all of which are comprised entirely of, and are chaired by, independent directors. We believe that this leadership structure has been effective for the Company by providing a balance of power with strong independent leadership.

Board’s Role in Risk Oversight

The Board’s role in the Company’s risk oversight process includes receiving regular reports from members of senior management on areas of material risk to the Company, including operational, financial, legal and regulatory, and strategic and reputational risks. The full Board (or the appropriate committee in the case of risks that are under the purview of a particular committee) receives these reports from the appropriate “risk owner” within the organization to enable it to understand our risk identification, risk management and risk mitigation strategies. When a committee prepares a report, the Chairman of the relevant committee provides an overview discussion to the full Board at the next meeting of the Board. This enables the Board and its committees to coordinate the risk oversight role, particularly with respect to risk interrelationships at the enterprise level.

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Board of Directors’ Meetings and Committees

Meetings.  During the fiscal year ended December 31, 2010, our Board of Directors held 18 meetings.  Each director attended more than 75% of the aggregate of (i) the total number of meetings of our Board held during the period for which he has been a director and (ii) the total number of meetings held by all committees of our Board on which he served during the period.

Committees.  Our Board of Directors has established four standing committees:  Audit, Compensation, Finance and Nominating and Governance.  All members of these committees are independent directors and there is no representation on any of these committees by employees of the Company. The membership of each committee as of November 29, 2010 is as follows:

Audit Committee.  All members of our Audit Committee qualify as independent as defined in the Nasdaq Stock Market and SEC rules.  Mr. Kletter is qualified as an audit committee financial expert, as defined by the SEC.  The Audit Committee is appointed by and reports to our Board of Directors.  Its responsibilities include, but are not limited to, the appointment, compensation and dismissal of our independent auditors, review of the scope and results of our independent auditors’ audit activities, evaluation of the independence of our independent auditors and review of our accounting controls and policies, financial reporting practices and internal audit control procedures and related reports.  During the last fiscal year, the Audit Committee held 5 meetings.  The Audit Committee’s charter can be found on our website at www.beaconpower.com.

Compensation Committee.  Our Compensation Committee has the authority to set the compensation of our Chief Executive Officer and all other executive officers and has the responsibility to review the design, administration and effectiveness of all programs and policies concerning executive compensation and establishing and reviewing general policies relating to compensation and benefits of employees.  The Compensation Committee administers our 2010 Stock Incentive Plan, constituting an amendment, restatement and renaming of the Third Amended and Restated 1998 Stock Incentive Plan and Employee Stock Purchase Plan.  Messrs. Smith, Rose and Weihman are non-employee directors who have no interlocking relationships as defined by the SEC, and are all independent pursuant to the rules of the Nasdaq Stock Exchange applicable to members of this committee.  The Compensation Committee held 12 meetings during the last fiscal year.   The Compensation Committee’s charter can be found on our website at www.beaconpower.com.

Nominating and Governance Committee.  The Nominating and Governance Committee recommends to the Board corporate governance guidelines applicable to the Board and to the Company and oversees the effectiveness of our corporate governance in accordance with those guidelines.  The committee also identifies individuals qualified to become Board members, reviews the qualifications of nominee directors and recommends to the Board the director nominees for annual meetings of stockholders and candidates to fill vacancies on the Board.  Additionally, the committee recommends to the Board the directors to be appointed to Board committees.  While the committee does not have a formal diversity policy for Board membership, the Board seeks directors who represent a mix of backgrounds, perspectives and experiences that will enhance the quality of the Board’s deliberations and decisions.

A stockholder may nominate a person for election as a director by complying with Section 2.2 of our By-Laws, which provides that advance notice of a nomination must be delivered to us and must contain the name and certain information concerning the nominee and the stockholders who support the nominee’s election.  A copy of this By-Law provision may be obtained by writing to Beacon Power Corporation, Attn:  James M. Spiezio, Secretary, 65 Middlesex Road, Tyngsboro, Massachusetts 01879.  Director nominees recommended by our stockholders will be considered on the same terms as other nominees.  All members of our Nominating and Governance Committee qualify as independent pursuant to the rules of the Nasdaq Stock Market.  The

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Nominating and Governance Committee held 7 meetings during the last fiscal year.  The charter for our Nominating and Governance Committee can be found on our web site at www.beaconpower.com.

Finance Committee.  The Finance Committee is appointed by the Board of Directors to assist the Board in monitoring material financial matters involving: (1) debt undertaken by the Company; (2) equity raised by the Company; (3) share splits or retirement of shares by the Company; (4) cash dividends or share dividends paid by the Company; (5) acquisitions and divestures; (6) significant changes in Company ownership; (7) project finance for the Company and/or for affiliates that it may sponsor; and (8) such other matters as are similar or related to these matters, or which the Board considers to be necessary or advisable. While the Committee has the responsibilities and powers set forth in its Charter, it is not the duty of the Committee to plan or conduct financial transactions nor does the Committee have any oversight responsibility with respect to the Company’s financial reporting. The Finance Committee held 6 meetings during the last fiscal year.  The Finance Committee’s Charter can be found on our website at www.beaconpower.com.

Limitation of Liability and Indemnification

Our Certificate of Incorporation limits the liability of our directors, officers and various other parties whom we have requested to serve as directors, officers, trustees or in similar capacities with other entities to us or our stockholders for any liability arising from an action to which such persons are a party by reason of the fact that they were serving Beacon or at our request to the fullest extent permitted by the Delaware General Corporation Law.

We have entered into indemnification agreements with our directors and executive officers.  Subject to certain limited exceptions, under these agreements, we will be obligated, to the fullest extent not prohibited by the Delaware General Corporation Law, to indemnify such directors and officers against all expenses, judgments, fines and penalties incurred in connection with the defense or settlement of any actions brought against them by reason of the fact that they were Beacon directors or executive officers.  We also maintain liability insurance for our directors and executive officers in order to limit our exposure to liability for indemnification of our directors and executive officers.

Code of Conduct

We have adopted and maintain a code of conduct that applies to all of our employees, including our chief executive officer, our chief financial officer and other senior financial officers. A copy of our Corporate Code Of Conduct can be found on the Internet at our website www.beaconpower.com, or by request, free of charge by writing to our Investor Relations Department at our principal executive office, 65 Middlesex Road, Tyngsboro, MA 01879. We intend to disclose on our website any amendments to the Code, or any waiver from a provision of the Code, affecting our chief executive officer, our chief financial officer or any of our other senior financial officers.

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Securities Exchange Act of 1934 (the “Exchange Act”) requires our directors and officers, and persons who beneficially own more than ten percent of a registered class of our equity securities, to file with the SEC initial reports of ownership and reports of changes in ownership of our Common Stock.  Directors, officers and greater than ten percent stockholders are required by SEC regulations to furnish us with copies of all Section 16(a) forms they file.

To our knowledge, during our fiscal year ended December 31, 2010, all Section 16(a) filing requirements applicable to our directors, officers and ten percent stockholders were satisfied.

Communication with Our Board of Directors

Our Board of Directors provides a process for our stockholders and other interested parties to send communications directly to our non-employee directors.  Any person who desires to contact the non-employee directors may do so by writing to:  Board of Directors, c/o Beacon Power Corporation, 65 Middlesex Road, Tyngsboro, Massachusetts 01879.

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Communications received will be forwarded directly to the Chair of the Nominating and Governance Committee.  The Chair of the Nominating and Governance Committee will, in his discretion, forward such communications to other directors, members of our management or such other persons as he deems appropriate.  The Chair of the Nominating and Governance Committee, or, if appropriate, our management, will respond in a timely manner to any substantive communications from a stockholder or interested party.

Our Audit Committee also provides a process to send communications directly to the committee about our accounting, internal accounting controls or auditing matters.  Any person who desires to contact the Audit Committee regarding such matters may do so by writing to Audit Committee of the Board of Directors, c/o Beacon Power Corporation, 65 Middlesex Road, Tyngsboro, Massachusetts 01879.

Communications received by mail will be forwarded directly to the Chair of the Audit Committee.  The Chair of the Audit Committee, in his discretion, will forward such communications to other directors, members of our management or such other persons as he deems appropriate.  The Chair of the Audit Committee, or, if appropriate, our management, will respond in a timely manner to any substantive communications from a stockholder or an interested party.

AUDIT COMMITTEE REPORT

The Audit Committee of our Board of Directors is composed of three members and acts under a written charter. All members of the Audit Committee are independent directors, as defined by its charter and the rules of the Securities and Exchange Commission and Nasdaq Stock Market.

In connection with the preparation and filing of our Annual Report on Form 10-K for the year ended December 31, 2010, the Audit Committee (i) reviewed and discussed the audited financial statements with management, (ii) discussed with Miller Wachman LLP, our independent auditors for the fiscal year ending December 31, 2010, the matters required to be discussed by Statement of Auditing Standards 61, as amended, as adopted by the Public Company Accounting Oversight Board and (iii) received the written disclosures and the letter from Miller Wachman LLP required by applicable requirements of the Public Company Accounting Oversight board regarding Miller Wachman LLP’s communications with the audit committee concerning independence, and has discussed the independence of Miller Wachman LLP with such firm.  Based on the review and discussions referred to above, among other things, the Audit Committee recommended to our Board of Directors that the audited financial statements be included in our Annual Report on Form 10-K for the year ended December 31, 2010.

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Item 11.  Executive Compensation

Compensation Discussion and Analysis

Executive Summary

Compensation Philosophy

Our executive compensation and benefit program has been designed to encourage our named executive officers (our chief executive officer, or CEO; our chief financial officer, or CFO; our chief technology officer, or CTO, and our Vice President of Asset Development and Market Development) to pursue our strategic objectives while effectively managing the risks and challenges inherent in a development stage company transitioning into a commercial company. We have created a compensation package that combines short and long-term components through a mix of base salary, bonus and equity compensation, in the proportions we believe are most appropriate to incentivize and reward our executive officers for achieving our strategic objectives. Moreover, the program is designed to be competitive with comparable employers and to align management’s incentives with the long-term interests of our stockholders.  Our compensation-setting process consists of establishing targeted overall compensation for each executive officer and then allocating that compensation among fixed and variable elements.  At the executive level, we design the incentive compensation to reward company-wide performance, shareholder value creation, and the achievement of specific financial, operational and strategic objectives.

Summary of 2010 Results

The Compensation Committee provided an increase in the executive officers’ salaries for 2010, to better align compensation to our peer group, and shifted executive compensation to a more performance-based mechanism.  There was no salary adjustment in 2009.  The Compensation Committee decided to better align executive compensation with shareholder interests by eliminating RSUs and to focus on annual grants of stock options and performance-based Restricted Stock Units (PSUs) which have no value unless the stock price appreciates (in the case of stock options) or important long term goals are achieved (in the case of PSUs).  Accordingly, our Compensation Committee believes that our compensation program is a performance-oriented structure, with a significant portion of compensation at risk for our executive officers.

In 2010 our executive officers’ performance relative to strategic objectives resulted in a 25% payout of the targeted bonus amount.  The objectives for 2010, as described in more detail below, had four primary components: (1) funding, including a stretch objective for funding, (2) the sale of a turn-key plant, (3) the build and operation of our Stephentown facility and (4) attracting a strategic partner.  The overall performance of our common stock price was also considered in evaluating executive performance.

·    Funding: The target related to closing the DOE loan guarantee, which was achieved in August of 2010. On the stretch objectives, the target was specifically to obtain a DOE loan guarantee for our second plant in Glenville, NY and getting a change in DOE rules to allow the possibility of a loan guarantee for our third plant in Hazle Township, PA.  Neither stretch target was achieved.

·    The sale of a plant: The target was to sign and announce the sale of a facility by the end of the year which was not achieved.

·    The build and operation of the Stephentown facility:  The target had two components (i) operation of the first 4MW and (ii) cost control consistent with the DOE loan guarantee estimate. The target for 4 MW being operational by year end was not achieved, but 4 MW became operational in January. The cost control target was achieved.

·    Obtaining a strategic partner: The target was to successfully close an agreement with a strategic partner by year end, which was not achieved.

·    Increasing the stock price: The stock price increase did not occur.  This part of the bonus formula contained both a positive and negative component. Based on stock price in the fourth quarter of the year, the adjustment was negative, resulting in a decrease in the bonus percentage awarded to the executives for 2010.

On average the Compensation Committee’s objective is to target our executive officers’ compensation at the median (between the 40th and 60th percentiles) within its peer group. Because the structure of our executive compensation program includes a significant portion of compensation that is performance-based, we believe the compensation paid to our executives fairly reflects the performance of our company.

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Role of Our Compensation Committee

Our Compensation Committee approves, administers and interprets our executive compensation policies. Our Compensation Committee is appointed by our Board of Directors, and consists entirely of directors who are “outside directors” for purposes of Section 162(m) of the Internal Revenue Code, “non-employee directors” for purposes of Rule 16b-3 under the Exchange Act and “independent directors” for purposes of the rules of the Nasdaq Stock Market.  Our Compensation Committee has three members:  Mr. Edward A. Weihman, Mr. Virgil G. Rose and Mr. Jack P. Smith, who chairs the committee.

Our Compensation Committee reviews and makes recommendations to our Board of Directors to ensure that our compensation program is consistent with our compensation philosophy and corporate governance guidelines and, subject to the approval of our Board (without the participation of the CEO), establishes the compensation paid or granted to our executive officers, which include our CEO, CFO, CTO and Vice President, Asset Management and Market Development. The Compensation Committee also establishes an overall pool of compensation for non-executive management and other employees.

Messrs. Weihman, Smith and Rose are non-employee directors who have no interlocking relationships as defined by the SEC, and are all independent pursuant to the rules of the Nasdaq Stock Market applicable to members of this committee.

Role of Compensation Consultant

The Compensation Committee generally engages an independent compensation consultant to provide a market perspective on executive compensation matters. In November of 2010, the Board passed a resolution to engage Pearl Meyers & Partners LLC as our compensation consultants. Previously, Towers Watson (formerly known as Watson Wyatt) had served as the Compensation Committee’s consultant since 2005. The Compensation Committee utilizes its consultants for various activities, including but not limited to peer group development, competitive market analysis, incentive plan design and assistance in pay determination. During 2010, we did not make any payments to Pearl Meyers & Partners but did pay Towers Watson approximately $80,000 for services provided.  None of these services related to matters outside of our executive compensation program. The Compensation Committee expects to continue to engage an outside advisor in the development of programs and pay setting activities.

Role of our Executive Officers

After consideration of input received from its compensation consultant, the Compensation Committee determines the compensation to be awarded to our CEO. The CEO and Compensation Committee jointly discuss the compensation for the other executive officers. However, the final decisions regarding compensation for all of the Executives are made by the Compensation Committee. The CEO and CFO, however, allocate the compensation pool approved by the Compensation Committee among all our other non-executive employees and provide recommendations to the Compensation Committee in regard to any equity compensation to be granted to the non-executive employees.

During the transition from development stage to commercial production, we have aligned the compensation structure of all other employees to the same company-wide strategic objectives and performance as the executive officers’ compensation.  As we move into volume production of commercial products, we will continue to evaluate the effectiveness of company-wide strategic objectives.  If we determine that company performance would be improved by combining these objectives with specific operational goals within areas, we will modify our programs.

Program Participants

Our named executive officers in 2010 were:

·        F. William Capp, Chief Executive Officer (CEO)

·        James M. Spiezio, Chief Financial Officer (CFO)

·        Matthew L. Lazarewicz, Chief Technical Officer (CTO)

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·        Judith F. Judson, Vice President, Asset Management and Market Development

On April 26, 2010, our Board of Directors promoted Judith Judson from Director of Regulatory and Market Affairs to Vice President, Asset Management and Market Development. As an executive officer of the Company, she was eligible to participate in our 2010 executive officer compensation programs.

Development of a Formal Compensation Program

Our Compensation Committee has taken the following steps to ensure that our compensation and benefit programs for executive officers are consistent with our compensation philosophy and our corporate governance guidelines:

·    Beginning in 2005, the committee has engaged and directed independent executive compensation and benefits consultants to assess the competitiveness of our compensation program and provide a high-level review of our long-term incentive plan

·    With the assistance of ongoing input from these consultants, we have developed appropriate compensation packages by targeting a competitive level of pay as measured against our peer group

·    We have maintained a practice of reviewing the performance and determining the total compensation earned, paid or awarded to our Chief Executive Officer independent of input from him

·    We have developed compensation guidelines for our Chief Financial Officer and Chief Technical Officer with assistance from our Chief Executive Officer, and determined what we believe to be appropriate total compensation based on competitive levels as measured against our peer group

·    We have maintained the practice of holding executive Board sessions, without executive officers present, at every Compensation Committee meeting

·    For the remainder of the management team, the Compensation Committee and executive officers review the compensation program to insure consistency with our compensation philosophy and governance guidelines.

Based on these efforts and examinations, the Compensation Committee developed a compensation program intended to be in place for the next several years and continues to monitor this program to ensure its effectiveness.

Market Referencing

To test the competitiveness of our compensation program, our consultants have been engaged to compare our compensation practices and levels to a group of specific peer companies, representative of companies of similar size and industry.  As our company continues to grow, this analysis continues to be assessed, and when appropriate updates to the compensation benchmarking peer group are made. The recommended changes, if any, in the peer group is then presented to the Compensation Committee for approval. In the most recent evaluation, a comparison group was selected using the following criteria:

·      Publicly-traded companies subject to disclosure requirements governed by the SEC

·      Companies that operate in the capital goods sectors or select companies in the clean technology industry

·      Companies that are similar in size to the company:

·      Market capitalization — generally within a range of .5X — 2.5X of our own

·      Revenue — generally within a range of $0 to $50 million

·      Companies that are generally in a similar business stage.

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Based on this analysis, the Compensation Committee determined that that the existing peer group of 11 companies listed below, as determined in prior years, continues to be appropriate and no changes were recommended:

·      Active Power Inc.

·      Akeena Solar Inc.

·      Ascent Solar Technologies

·      Capstone Turbine Corporation

·      Daystar Technologies Inc.

·      Evergreen Energy Inc.

·      Hoku Scientific Inc.

·      Ocean Power Technologies Inc.

·      Satcon Technology Corporation

·      Spire Corporation

·      UQM Technologies, Inc.

The Compensation Committee engaged Towers Watson in December 2009 to update its 2007 benchmarking analysis. Pearl Meyers & Partners did not perform this analysis at the end of 2010.  The analysis consisted of assessing our named executive officer compensation against that of the peer group.  The analysis specifically reviewed base salaries, annual incentive targets, long-term incentive levels and overall total direct compensation.  As a group, our named executive officers’ base salaries in 2009 were between the 25th and 50th percentile of the peer group, while target total direct compensation (TDC) was closer to the market 50th percentile (CEO TDC approximated the market 30th percentile).  The Committee also reviewed annual and three year Total Shareholder Return (TSR) performance of the company versus its peer group and the Russell 2000 (small cap index). It was determined that the Company underperformed the peer group and index with regards to shareholder return.

We intend to continue our strategy of providing competitive compensation opportunities to our executive officers, through programs that emphasize performance-based incentive compensation in the form of cash and equity. To that end, total executive compensation is structured to ensure that, due to the nature of our business, there is an equal focus on our operational and financial performance and stockholder return. We believe that the positioning of our executive officer compensation was consistent with our financial performance, the individual performance of each of our executives and the interests of our stockholders. We also believe that the total compensation was reasonable in the aggregate. Further, in light of our compensation philosophy, we believe that the total compensation package for our executive officers should continue to consist of base salary, annual cash incentive awards (bonuses), long-term equity-based incentive compensation, and certain other benefits.

The competitive posture of our total annual direct compensation will vary from year to year based on our results and individual performance, as compared to the performance of the peer group companies and the respective level of annual performance bonus awards made to their executives.

Components of Compensation Program

Our performance-driven compensation program has both short-term and long-term components. Our executive officers’ compensation is defined in the Executive Agreements (which are further detailed in the section titled “Executive Officer Employment Agreements” below.)  All of our other employees are employees at will.  However, all of our employees participate in the compensation programs as noted below.

Current Compensation Components

We utilize current compensation components that include base salary and cash bonuses to motivate and reward our employees, including our executive officers, in accordance with our defined objectives. Our Compensation Committee has established this program to set and refine management objectives and to measure performance against those objectives. The Compensation Committee reviews its conclusions on short term

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compensation with the Board (without the participation of the CEO), and once a consensus is reached, the short term compensation decisions are presented to the executive officers.

Base Salary

Base salary rewards the experience, skills, knowledge and responsibilities required of each of our executive officers and reflects competitive market conditions. The factors considered in determining salary and annual increases to salary are:

·        Experience

·        Functional role

·        Level of responsibility

·        Performance and accomplishments

·        Comparisons against market benchmarks described earlier in this discussion

·        Trends in compensation for the geographic region

·        Professional effectiveness including leadership, commitment, creativity and team building

·        Knowledge, skills, attitude and focus

·        Competitive market for corresponding positions within comparable geographic areas and industries

Using the criteria outlined above, our Compensation Committee works directly with its independent compensation consultant to determine the compensation recommendations that our Compensation Committee makes to our Board of Directors regarding specific compensation actions for the executive officers.  The Compensation Committee evaluates each executive officer’s base salary in terms of his or her individual performance and his or her compensation relative to the peer group.  The Compensation Committee decided on April 26, 2010, to increase the executive officers’ base salaries as follows:

There was no base salary adjustment in 2009.  The Compensation Committee determined that it was necessary to increase Mr. Capp’s salary by 9.8% as it had fallen to the lowest within our peer group. Ms. Judson’s increase was a result of her promotion on April 26, 2010 to an officer’s position. Messrs. Spiezio and Lazarewicz received merit increases, consistent with information provided by our compensation consultant.

Performance Bonus

Overview of Performance Bonus Program

Awards under the performance bonus program are based on a quantitative and qualitative review of all of the facts and circumstances related to the Company and each executive’s performance.  An executive officer may receive awards from zero to 100% of his or her target bonus based on the review of results.  Additional compensation may be awarded for performance at levels above targeted goals and objectives or improvement in the timing of achieving certain results.  The criteria for these potential additions to the bonus are clearly defined as part of establishing the potential bonus structure each year. For 2010 the potential additional award was 55% of which none was achieved.

On an individual level, the Compensation Committee attempts to set clearly defined goals for each executive officer, focusing on the categories mentioned below, with an emphasis on quantifiable and achievable goals. Once the defined goals have been identified, the Compensation Committee engages in a collaborative process with the executive officers to reach agreement on the following aspects of the short term goals:

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·      Agreement that the goals formulated are viewed by the executive officers as the correct drivers for the business from their perspectives

·      Consistency of these goals with our short and long term strategies

·      Timing, measurability and relative values that should be ascribed to each goal; and

·      Agreement that the goals are difficult yet realistically attainable.

The Compensation Committee sees this process both as the optimal means of assembling accurate information regarding the expectation and realization of performance, as well as an integral part of our culture of collaborative, team-oriented management.

The Compensation Committee evaluates each executive officer as well as our other key employees once each year based on the achievement of set goals. This review is typically done during the first quarter of the year. We review final results for the year versus pre-determined objectives and begin discussions regarding performance objectives for the current fiscal year. Performance bonuses, at the discretion of the Compensation Committee, may be awarded in the form of cash or RSUs and equity-based awards. During recent years, the performance bonuses have been paid in cash.

Total compensation for our executive officers may vary significantly from year to year, based on the percentage of achievement of goals. In addition, the value of equity awards in either PSUs or stock options may vary significantly in value based on the performance of our stock price.

Discretionary Bonus

Additional discretionary awards of the target bonus may be awarded for performance to targets that emerge subsequent to the establishment of the year’s bonus program or other achievements not previously identified, or performance to existing targets that is greater or timelier than the target.

2010 Performance Bonus and Resulting Bonus Payout

Our business strategy is to become a leader in providing frequency regulation services to the electrical grid. We expect to increase our revenues from the commercialization of our flywheel energy storage systems to supply frequency regulation services to the electricity grid in North America and from the sale of turnkey systems outright or on a fractional basis, both within the United States and on a global basis. In order to accomplish these goals, we will need to expand manufacturing capabilities, acquire appropriate locations for installation of our flywheel systems and raise additional financing. We must also focus on continually strengthening our management and technical teams, in order to provide the human resources necessary to carry out our business objectives.

In 2010, we made progress in executing our strategic plan. For 2010, the target performance goals and results were as follows:

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The overall evaluation of performance to targets for 2010 was that as a percentage of targeted objectives, an appropriate rating would be approximately 50%.  However, the Compensation Committee, upon reviewing the results of executive performance for 2010 determined that an award of 25% was appropriate due to the stock price adjustment resulting from the low stock value for the last three months of 2010.  The Compensation Committee determined that 25% was a fair payout. Accordingly, for our executive officers, the targeted and actual bonuses paid in cash in April 2011 for our 2010 performance plan were as follows:

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The bonus potential as a percent of salary is defined in the executive officers’ Employment Agreements with the Company. These agreements are further described below.

Long-term Compensation

In prior years, our long-term compensation for executive officers has consisted of a combination of common stock options and RSUs, all with a three year vesting period, and performance stock units (PSUs) tied to achieving specific longer term objectives.  Our practice had been to grant stock options and RSUs on an annual basis at the time of annual performance review. All options, RSUs and PSUs are granted under our Third Amended and Restated 1998 Stock Incentive Plan, which was amended, restated and renamed the 2010 Stock Incentive Plan at our 2010 Annual Meeting on July 21, 2010.  Given market conditions and our stock price as of the beginning of 2010, the Compensation Committee decided to change the 2010 executive equity awards structure.  The Compensation Committee opted to utilize two long-term incentive vehicles (PSUs and stock options) and not to use RSUs any longer.  The Compensation Committee chose to discontinue RSU and focus on annual grants of PSUs and stock options which are inherently performance-based because they have no value unless the stock price appreciates (in the case of stock options) or important long term goals are achieved (in the case of PSUs.).  The Compensation Committee strongly believes that executive share ownership further ensures shareholder alignment and it was the Compensation Committee’s intention that the proposed long-term incentive program would allow for management to earn above market equity ownership levels when Company mid- and long-term financial goals are met.  Aligning executive compensation with the Company’s long-range objectives should limit the executives’ incentive to make decisions that improve short-term metrics but increase the Company’s risk exposure. Thus, we believe this strategy aligns the interests of our executive officers with those of our stockholders over the long-term, focuses on attaining key operational milestones, and provides an effective retention feature.

Prior to 2010, PSUs were last granted in 2006 as a special grant to motivate the executives to achieve specific long-term financial objectives.  These 2006 PSUs were scheduled to cliff vest in 2009 or 2010 based upon the achievement of the specified objectives.  Management did not meet those objectives for 2009 or 2010, so none of the PSUs from the 2006 grant vested, and instead such PSUs were forfeited.  See “Performance Stock Unit Grants” below for details regarding the PSUs granted in 2010.

We analyze the following when we set the number of options or PSUs to be granted to each executive.  On an individual basis, we compare:

·      The fair value of the grants valuation for equity awards that is consistent with Accounting Standards Codification Topic 718

·      The number of common stock options and PSUs granted by position

·      The competitive level of our equity-based compensation practices versus the market based upon our peer group, including levels, share usage levels, dilution and overall equity plan expense.

Each of the elements of our LTI program — stock options and performance stock units — is discussed in more detail below.

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Targeted Pay Mix and Determination of Long Term Incentive (LTI) Equity Grants

During recent years, the Compensation Committee had targeted the long-term incentive equity grants (options and RSUs) to the executive officers at 100% of base salary for our CEO and at 55% of base salary for our other executive officers.  In 2009, the Compensation Committee agreed to grant 75% of the LTI value in options, and the remainder in RSUs.  The number of options granted was calculated by dividing the targeted dollar amount by the average closing price for our stock for the preceding calendar year, and multiplying this value by 75%.  The number of RSUs was calculated by multiplying the remaining number of shares by a 3:1 conversion ratio. The use of the prior year average stock price to calculate the size of the LTI grant was a change from prior years, when the Black-Scholes value of the current stock price at date of grant was used to calculate the number of options/RSUs granted.  This change was taken in response to a decrease in the company’s stock price. The result of this process in 2009 was to grant the executives 120% of the number of shares they had been granted in 2008, but considerably fewer shares than would have been granted under the prior formula.  The Black-Scholes value per share of the options granted was only 22% of the value used to calculate the grant size.  Consequently, the actual LTI value as a percent of salary was significantly lower than the targeted percentage.

In 2010, the Compensation Committee continued to target the long-term incentive equity grants to the executive officers at 100% of base salary for our CEO and at 55% of base salary for our other executive officers, excluding the value of the PSUs.  The number of options granted was calculated by multiplying the executive’s base salary by the LTI target percentage (100% or 55%), and then dividing the resulting amount by our average stock price for 2009, consistent with the methodology used in 2009.  The Black-Scholes value per share for the 2010 grants was 44% of the value used to calculate the grant size.  In addition, in 2010, the executives were also granted PSUs.  As a result, although the actual LTI value as a percent of salary is still lower than the targeted percentage, the LTI as a percent of base salary for 2010 is more than double the percentage granted in 2009.

The charts below show long-term incentive (LTI) grants as a percentage of base salary for 2009 and 2010:

(1) Ms. Judson was not an officer in 2009, and thus was not eligible for the LTI grants to the executive officers in that year.

In total, we believe that our executives’ pay mix reflects a significant percentage of pay at risk and allows for appropriate risk-taking.

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Common Stock Option Grants

Our common stock option grants are designed to align our executives’ performance objectives with the interests of our stockholders. We believe that these options provide an important component of executive compensation which is fully aligned with our shareholders’ interests whereby the impact of any business setbacks, whether Company-specific or industry based, achievement of objectives or other performance matters impacts the executive officers as well as shareholders directly. Our Compensation Committee also grants options to key employees based on this same rationale and enables these key employees to participate in the long term appreciation of our stockholder value.  In addition, all new permanent, full-time employees are granted options when they join the Company. We further believe that our option grants provide a means to assist in the retention of key employees, inasmuch as they are in almost all cases subject to vesting over an extended period of time.

In 2010, we granted options vesting over three years to our executive officers pursuant to the Executive Agreements as follows:  Mr. Capp, 97,335 options; Mr. Spiezio, 35,767 options; Mr. Lazarewicz, 32,114 options and Ms. Judson, 26,356 options. These options had exercise prices based on the stock closing price on the date of grant, which was $4.46.

Restricted Stock Unit Grants

In prior years, RSUs were granted to our executive officers pursuant to the Executive Agreements, which historically have been renegotiated annually. Our issuance of RSUs was a further effort to align management’s performance objectives with the interest of shareholders by having the same attributes as our vesting stock options with the additional alignment of each executive officer owning actual shares. These RSUs vest quarterly over a three year period, and are generally converted to common stock on the vesting dates.  In 2010, rather than issue RSUs that vest based on time, a new, multi-year performance stock units (PSU) plan was implemented, under which the executive officers were granted PSUs as described below.

Performance Stock Unit Grants

Our Performance Stock Units (PSUs) are also designed to align management’s performance objectives to shareholder interest by providing stock grants that cliff-vest upon achievement of specific longer term, multi-year objectives of interest to our investors.

The executive officers were granted PSUs as part of their Executive Agreements in 2006 to incentivize the executive team to maintain a sustained drive and focus on moving the development-stage company successfully into production.  The 2006 PSUs were structured to provide Mr. Capp with potential awards valued at $1,000,000 and Mr. Spiezio and Mr. Lazarewicz with potential awards valued at $500,000 each, where the unit price used to calculate the number of units was $15.80, the average of the high and the low stock price on the date of grant.  This equated to a potential award of 63,291 shares to Mr. Capp and 31,646 shares each to Mr. Spiezio and Mr. Lazarewicz.  There were no additional PSUs granted in 2007, 2008 or 2009.  We did not meet the award conditions as of December 31, 2009, and our executive management did not believe that it was probable that the award would be earned in 2010 based on the business plan at that time.  Therefore, on April 26, 2010, the 2006 PSUs were forfeited by the executives.

The Compensation Committee believes that it is important to align management’s performance with the objectives of shareholder interest by providing stock grants that cliff-vest upon achievement of specific longer term performance objectives of interest to our investors. Hence, a new annual PSU plan was put in place April 26, 2010.  The new PSU grants cliff vest upon the achievement of specific longer-term performance objectives, e.g., PSUs granted in 2010 cliff vest upon the achievement of certain performance conditions in 2011 or 2012. We anticipate that PSU grants will be made on an annual basis going forward.

Under the new PSU plan that became effective on April 26, 2010, we granted PSUs to the executives on June 30, 2010, for a number of shares of common stock that were determined by dividing $125,000 for Mr. Capp and $62,500 for the other executive officers by the twelve month VWAP (volume weighted average price) of our stock immediately preceding June 30, 2010.  When calculating the number of shares the PSU granted, the number of shares granted is however, the number of shares is subject to a 25,000 maximum share limit (for Mr.

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Capp) or a 12,500 share limit (for the other officers), unless the share limit is waived by the Board of Directors, and further subject to a 5,000 minimum share limit (for Mr. Capp) or a 2,500 minimum share limit (for the other officers).  The number of PSUs granted may be converted into that number of shares of common stock equal to up to 150% of the PSUs granted.  The award grant is contingent upon the executive being a full-time employee as of the grant date.

Upon conversion of the PSUs into shares of common stock, shares representing 50% of the net after-tax value of the PSUs will be non-transferable for a two-year period commencing on the determination date.  This holding period becomes inoperative upon an acquisition event.  The determination date for the PSUs granted in 2010 is March 15, 2013.

The PSUs granted in 2010 will vest as of December 31, 2012, subject to the achievement of the performance requirements described below, which are based on the achievement of certain Adjusted EBITDA targets. Adjusted EBITDA is defined as our income before the effect of interest expenses, income taxes, depreciation, amortization and equity compensation expenses as set forth in our audited Consolidated Statement of Operations and the related Notes.  Any portion of the PSUs that does not vest as of the determination date shall be forfeited.  The PSUs granted in 2010 were granted contingent upon shareholder approval of the 2010 Stock Incentive Plan.  This approval was obtained at the 2010 Shareholder Meeting held July 21, 2010, thus the grant date for accounting valuation purposes is considered to be July 21, 2010.  The closing price of our stock on July 21, 2010 was $3.20.  The PSUs granted for 2010 were as follows:

The vesting schedule for the 2010 grants is as follows:

Vesting of PSUs for Adjusted EBITDA achieve between $8.5 million and $46 million shall be interpolated on a straight line basis, with the aggregate rounded up to the next whole integer of a PSU.  Each vested PSU will convert into one share of common stock on the determination date, provided that (a) for Adjusted EBITDA achievement between $46 million and $69 million, the conversion factor will be interpolated on a straight line basis between 100% and 150% as applied to the PSUs, and (b) for Adjusted EBITDA achievement at or greater than $69 million, each PSU shall convert into 1.5 shares of common stock on the determination date (shown above in the column titled, “Maximum Common Shares”).  The Company

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reserves the right, in lieu of issuing shares of common stock upon conversion, to pay the executive a lump sum cash payment in an amount equal to the fair market value on the date of conversion of the shares of common stock into which all or any portion of the vested PSUs would have been converted.

Equity Grant Practices

During 2010, our Board granted common stock options and PSUs based upon the recommendations of our Compensation Committee and the Executive Agreements. These grants to executive officers were made during regularly scheduled meetings of the Board of Directors. Mr. Capp and Mr. Spiezio have been authorized by the Board of Directors to issue common stock option grants to individuals being hired and promoted, within certain limits which have been predetermined by the Board based upon job title and function.

The Board of Directors takes into account a wide variety of factors when determining the timing of specific grants, including the pricing of our most recently completed equity financing; the status of additional equity or debt transactions; the status of our various research and development activities; the quality and growth of our management team; and specific and general market comparables.

In addition to the options granted to the executive officers, our policy has been to grant common stock options to all full-time permanent new hires at the time of employment. The number of options varies depending on the position and experience of the new hire.  Further, options or RSUs may be granted to employees as part of the annual compensation review.  Typically, options granted vest quarterly over a three year period.

Executive Officer Employment Agreements

On April 26, 2010, we entered into employment agreements with our executive officers, commencing on the date of the agreement and continuing until March 31, 2011, unless renewed or terminated.  Additional agreements providing for long term incentive compensation consisting of performance-based Restricted Stock Units (PSUs) and stock options were also dated April 26, 2010.  The terms of the employment and option agreements were similar to those of the executive officer agreements dated May 8, 2006, March 2, 2007, February 12, 2008 and April 3, 2009. However, in contrast, there were no 2007, 2008 or 2009 counterparts of the performance-based RSU agreements that were signed in 2006 and in 2010.  On March 4, 2011, we entered into new employment agreements with the executive officers for a term that began on that date. Additionally, the executive officers received option grants.  The 2011 employment agreements, unlike previous agreements, have no expiration date.

These agreements, in total, will be referred to as the “Executive Agreements.” In addition to the Base Salary and Targeted Bonus amounts (discussed above under “Current Compensation” section), the Executive Agreements specified other benefits, such as vacation time and fringe benefits.  The fringe benefits include those available to our other employees, such as group health and dental insurance, life insurance, group long and short-term disability insurance, 401(k) plan, and stock plan participation.  In addition, each executive officer is entitled to reimbursement for an executive physical every other year (not to exceed $1,000 for each such physical), as well as an additional life insurance policy over and above the insurance plan provided to all employees.  Further, in the event that the executive officer becomes disabled and receives disability insurance payments that are less than his or her monthly base salary, we will pay him or her the difference between the normal base salary and the insurance payment, for the duration of his or her employment, as defined in the Executive Agreement.  These agreements also contain certain provisions related to severance and change of control, which are discussed further in the section titled, “Potential Payments upon Termination or Change in Control.”  We believe these benefits are consistent with those offered by other companies.

We do not have a supplemental retirement plan or any form of executive retirement plan.

Some additional provisions of the Executive Agreements include the following:

·      Each executive officer is entitled to 20 business days of paid vacation per calendar year.  Any paid vacation time accrued (“PVA”) prior to January 1, 2010 is considered “grandfathered.”  The number of

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unused vacation days that may be carried forward from one calendar year to the next is limited to ten days of the current calendar year’s unused accrual, plus the grandfathered PVA.  For any unused vacation accrual from the current calendar year that cannot be carried over into the next year, the Company will pay the executive a cash amount equal to the value up to a maximum of ten vacation days. Any unused excess over ten vacation days from the current calendar year that was accrued will be forfeited.  The Compensation Committee, in its sole discretion, may elect from time to time to direct the Company to pay the executive a cash amount (based on the executive’s then current year’s base salary) equal to part or all of the PVA.  Upon any termination of employment, the Company shall pay the executive a lump sum equal to any unused PVA, plus a lump sum equal to up to ten days of current year vacation accrual.   Any remaining accrued but unused or unpaid days shall be forfeited.

·      In the event that the excise tax imposed by Section 4999 of the IRS code of 1986 (or any successor penalty or excise tax subsequently imposed by law) applies to any payments or benefits specifically paid or conferred under the Executive Agreement, we will pay an additional amount to the executive equal to the amount of the excise tax, up to a maximum of $500,000 for Mr. Capp and $250,000 for the other executive officers in regards to salary, vacation, and bonus.  We will also pay an additional amount up to a maximum of $500,000 for Mr. Capp and $250,000 for the other executive officers in regards to any exercise tax under benefits conferred by stock options, RSUs and PSUs provided, however, that in no event will the aggregate additional payment exceed $500,000 for Mr. Capp and $250,000 for the other executive officers.

Up through 2010 we entered into short term (year to year) Executive Agreements with our management team because of the increased flexibility that it gives us and them to adjust compensation, long term incentive award expectations and other expectations from year to year in light of our performance, cash position, and other conditions.  However, in the first quarter of 2011, we entered into “at-will” evergreen agreement in order to eliminate the need to negotiate new Executive Agreements every year, thus freeing management’s (and the Board’s) time and attention to the operations of the Company.

Compensation Committee Interlocks and Insider Participation

From January 1, 2010 until November 29, 2010, the Compensation Committee members were Messrs. Smith (Chair), Adik and Rose, none of whom currently are or formerly were our officers or employees.  On November 29, 2010, upon the resignation of Mr. Adik from our Board, the Compensation Committee members were Mssrs. Smith, Weihman, and Rose.  None of our executive officers served as a member of the board of directors or compensation committee of any other company that had one or more executive officers serving as a member of our Board of Directors or Compensation Committee.

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COMPENSATION COMMITTEE REPORT

We have reviewed and discussed the foregoing Compensation Discussion and Analysis with management.  We have reviewed the incentive plans for the executive officers to ensure that these incentives do not provide the executives with incentives that require actions that represent excess risks that would not be in the best interest of our shareholders, as discussed in the section titled “Consideration of Risk in Compensation Programs” which follows the Executive Compensation tables, below. Based on our review and discussion with management, we have recommended to the Board of Directors that the Compensation Discussion and Analysis be included in this Annual Report.

The following report is provided by the following directors, who constitute the Compensation Committee:

Notwithstanding anything to the contrary set forth in any of our previous filings under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, that incorporate future filings including this Annual Report, in whole or in part, the foregoing Compensation Committee Report shall not be incorporated by reference into any such filings.

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Summary Compensation Table

The following table(s) sets forth the total compensation paid in the years ended December 31, 2008, 2009, and 2010 to the four persons who served as our executive officers during fiscal 2010:  F. William Capp, our Principal Executive Officer; James M. Spiezio, our Principal Financial Officer; Matthew Lazarewicz, our Chief Technology Officer and Judith F. Judson, our Vice President, Asset Management and Market Development.

(1)     Salaries are reported on the accrual basis.

(2)     Cash bonuses to the executive officers were made under our Incentive Compensation Plan, and thus are reported in the column titled, “Non-Equity Incentive Plan Compensation.”  No bonuses were made to the executive officers outside of this plan.

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(3)     For 2010, the stock awards represent the grant date fair value of the PSUs granted to the executive officers under their Executive Agreements during the year.  These PSUs will cliff-vest as of December 31, 2012, subject to the achievement of certain EBITDA targets.  If the targets are not met, the PSUs will be forfeited.   Management believes that the targets that were set for the 2010 PSUs are extremely difficult to meet, and that the probability of meeting these targets is very low.  For 2009 and 2008, the stock awards represent the grant date fair value of the RSUs granted to the executive officers under their Executive Agreements during those years.  The fair value of the PSUs and RSUs is computed in accordance with FASB ASC Topic 718. See Note 16 to our Consolidated Financial Statements in our Annual Report on Form 10-K, which is incorporated herein by reference, for a discussion on the assumptions made in the valuation of these PSUS and RSUs.

(4)     Options include the grant date fair value of the options granted to the executives during the year, calculated in accordance with FASB ASC Topic 718.  See Note 16 to our Consolidated Financial Statements in our Annual Report on Form 10-K, which is incorporated herein by reference, for a discussion of the assumptions made in the valuation of these options.

(5)     The amounts shown as “Non-Equity Incentive Plan Compensation” represent the actual bonuses earned per the 2008, 2009 and 2010 Incentive Bonus Plans. These bonuses were paid in February 2009, March 2010 and April 2011, respectively.  See details of the incentive bonus plan structure in the Compensation Discussion and Analysis.

(6)     All of our employees, including our executive officers, are eligible to participate in our qualified deferred-contribution plan (401(k)).  There are no additional executive retirement plans.

(7)     The amounts shown in the “All Other Compensation” column consist of the following:

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(a)   Represents the cost of life insurance coverage which is provided to the executive officers for which we are not the beneficiary.

(b)   We match 50% of the amount our plan participants contribute to our qualified defined contribution (401(k)) plan. The maximum company matching contribution is 3% of salary.  The amounts shown represent the company matching contributions for the individuals choosing to participate in the plan.

(c)   In January 2008, we relocated our offices and manufacturing facility from Wilmington, Massachusetts to Tyngsboro, Massachusetts.  As a result of the move, a significant percentage of our work force had longer daily commutes to and from work.  To compensate the employees for the additional commuting cost and as an incentive not to leave the Company, the Board authorized management to pay affected employees a mileage differential.  This mileage differential is paid each quarter over a three-year period, and is calculated based upon the incremental number of commuter miles, times the IRS mileage rate, times the number of work days per quarter (which has been determined to be 60 days.)   Affected employees who relocate their personal residence nearer the Tyngsboro facility are eligible for a one-time payout of the mileage compensation remaining through the end of the program (which is December 31, 2010).  In 2008, Mr. Capp and Mr. Lazarewicz were both eligible for this mileage reimbursement program.  During 2008, Mr. Capp relocated his residence, and so received the one-time payout noted above.  In 2009 and 2010, only Mr. Lazarewicz continued to be eligible for the mileage differential payments.

(d)   Represents reimbursement of the cost of an executive physical examination to which the officers are entitled every other year under the terms of the Executive Agreement.

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Grants of Plan-Based Awards

The following table shows all grants made to our executive officers during the year ended December 31, 2010:

Note that the column titled “All Other Stock Awards: Number of Shares of Stock or Units” was not presented for 2010 because there were no such awards made in 2010.

(1)     Non-Equity Incentive Plan Awards:  The amount shown in the Target column represents the amount which executive officers were eligible to receive if all goals for the 2010 Performance Bonus Plan were met.  If none of the goals were achieved, no bonus would be paid, as reflected in the Threshold column.  In addition, there were “stretch” goals, which if achieved, could have resulted in bonus payments of up to 155% of the Target amounts for the executive officers. These stretch goal amounts are reflected in the “Maximum” column in the table above.

(2)   Equity Incentive Plan Awards:  These awards represent PSUs granted to the executive officers under the 2010 Executive Agreements.  These PSUs cliff-vest on December 31, 2012, based upon the achievement of the performance goals.  The goals are based on the achievement of certain Adjusted

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EBITDA targets. (See the Compensation Discussion and Analysis.) Adjusted EBITDA is defined as our income before the effect of interest expenses, income taxes, depreciation, amortization and equity compensation expenses as set forth in our audited Consolidated Statement of Operations and the related Notes.  Any portion of the PSUs that does not vest as of the determination date (March 15, 2013) shall be forfeited.  The PSUs granted in 2010 were granted contingent upon shareholder approval of the 2010 Stock Incentive Plan.  This approval was obtained at the 2010 Shareholder Meeting held July 21, 2010, thus the grant date for accounting valuation purposes is considered to be July 21, 2010.  The closing price of our stock on July 21, 2010 was $3.20.

(3)     Option Awards: These awards represent options granted to the executive officers under the 2010 Executive Agreements. The exercise price of the options was $4.46, which was the closing price of our stock on the date of grant.  A portion of the options granted to Mr. Capp in 2010 were granted contingent upon shareholder approval of the 2010 Stock Incentive Plan.  This approval was obtained at the 2010 Shareholder Meeting held July 21, 2010, thus the grant date for accounting valuation purposes for that portion of the option grant is considered to be July 21, 2010.  The stock price on July 21, 2010 was $3.20.

Outstanding Equity Awards at Fiscal Year-End

The following table shows the unexercised options, unvested stock grants, and equity incentive plan awards outstanding relating to our executive officers as of December 31, 2010:

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