All of the major research funded under the Compressed Air Energy Storage Technology Program during the period March 1980 to March 1981 is described. This annual report is divided into two segments: Reservoir Stability Studies and Second-Generation Concepts Studies. The first represents research performed to establish stability criteria for CAES reservoirs while the second reports progress on research performed on second-generation CAES concepts. The report consists of project reports authored by research engineers and scientists from PNL and numerous subcontractors including universities, architect-engineering, and other private firms.