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FORM 10-Q

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

(MARK ONE)
	x		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarter ended June 30, 2002
			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 000-31687

Evergreen Solar, Inc.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

259 Cedar Hill Street
Marlboro, Massachusetts 01752
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)

(508) 357-2221
(REGISTRANT’S TELEPHONE NUMBER, INCLUDING AREA CODE)

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

     Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: As of August 1, 2002 there were 11,408,691 shares of common stock outstanding.

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EVERGREEN SOLAR, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2002

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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Evergreen Solar, Inc.
Condensed Consolidated Balance Sheets
(in thousands, except share data)
(unaudited)

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

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Evergreen Solar, Inc.
Condensed Consolidated Statements of Operations
(in thousands, except per share data)
(unaudited)

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

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Evergreen Solar, Inc.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)

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

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1.    Basis of Presentation

The accompanying condensed consolidated interim financial statements of Evergreen Solar, Inc. (“Evergreen Solar” or the “Company”) are unaudited and have been prepared on a basis substantially consistent with the Company’s audited financial statements for the year ended December 31, 2001. The condensed consolidated interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information. Consequently, these statements do not include all disclosures normally required by generally accepted accounting principles for annual financial statements. These condensed consolidated interim financial statements should be read in conjunction with the Company’s audited financial statements for the year ended December 31, 2001, which are contained in Evergreen’s Annual Report on Form 10-K for the fiscal year ended December 31, 2001, which was filed with the Securities and Exchange Commission on March 28, 2002. The unaudited condensed consolidated interim financial statements, in the opinion of management, reflect all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation of the financial position at June 30, 2002, the results of operations for the three and six month periods ended June 30, 2002 and 2001, and the cash flows for the three and six month periods ended June 30, 2002 and 2001. The balance sheet at December 31, 2001 has been derived from audited financial statements as of that date. The results of operations for the interim periods are not necessarily indicative of the results of operations to be expected for any other interim period or for the full fiscal year ending December 31, 2002.

2.    Net Income (Loss) per Common Share

The Company computes net loss per common share in accordance with SFAS No. 128, “Earnings Per Share” (“SFAS 128”), and SEC Staff Accounting Bulletin No. 98 (“SAB 98”). Under the provisions of SFAS 128 and SAB 98, basic net loss per common share is computed by dividing net loss attributable to common stockholders by the weighted average number of common shares outstanding. The calculation of diluted net loss per common share for the three and six month period ended June 30, 2001 and 2002 does not include 1,251,084 and 1,549,589 potential shares of common stock equivalents outstanding at June 30, 2001 and 2002, respectively, as their inclusion would be antidilutive.

3.    Inventory

A summary of inventories is as follows:

4.    Deferred Compensation and Equity Related Charges

Through December 31, 2000, we recorded total cumulative deferred compensation of approximately $1.3 million representing the difference between the estimated fair market value of our common stock and the exercise price on the option grant date. These amounts were presented as a reduction of stockholders’ equity and are being amortized ratably over the vesting period of the options, which is generally four years. The amortization resulted in charges to operations of $149,000 and $143,000 for the six months ended June 30, 2001 and 2002, respectively.

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5.    Segment Information

For the six months ended June 30, 2001, revenues generated from within the United States and outside the United States were approximately $1.0 million and $28,000, respectively. For the six months ended June 30, 2002, revenues generated from within the United States, Germany, Japan, and other countries outside the United States were approximately $1.3 million, $800,000, $160,000, and $185,000, respectively.

For the six months ended June 30, 2001 and 2002 revenues from the National Institute of Standards and Technology accounted for 30% and 18% of total revenues, respectively, and revenues from the National Renewable Energy Laboratory accounted for 19% and 0% of total revenues, respectively. Revenues from one distributor accounted for approximately 26% of total revenues for the six months ended June 30, 2001 and approximately 7% for the six months ended June 30, 2002, and another distributor accounted for 0% of total revenues for the six months ended June 30, 2001 and approximately 33% for the six months ended June 30, 2002.

6.   Recent Accounting Pronouncements

In October 2001, the FASB issued SFAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets. The objectives of SFAS 144 are to address significant issues relating to the implementation of SFAS 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, and to develop a single accounting model, based on the framework established in SFAS 121, for long-lived assets to be disposed of by sale, whether previously held and used or newly acquired. SFAS 144 is effective for financial statements issued for fiscal years beginning after December 15, 2001 and, generally, its provisions are to be applied prospectively. To date, SFAS 144 has had no impact on our financial position or results of operations.

ITEM 2.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

We caution readers that statements in this Quarterly Report on Form 10-Q that are not strictly historical statements constitute forward-looking statements which are made pursuant to the safe harbor provisions of Section 21E of the Securities Exchange Act of 1934. These statements may be identified with such words as “we expect”, “we believe”, “we anticipate” or similar indications of future expectations. These statements are neither promises nor guarantees, and involve risks and uncertainties which could cause our actual results to differ materially from such forward-looking statements, including, among other things, those risks and uncertainties described below in this Quarterly Report under the caption “Certain Factors which may Affect Future Results” and in our other filings with the Securities and Exchange Commission. We caution readers not to place undue reliance on any forward-looking statements contained in this Quarterly Report, which speak only as of the date of this Report.

OVERVIEW

We develop, manufacture and market solar power products for the global marketplace. Solar cells are semiconductor devices that convert sunlight into electricity and form the building block for all solar power products. To date, our product sales have been primarily solar panels, which have been used to generate electricity for on-grid and off-grid applications. Off-grid applications have included the electrification of rural homes, lighting for small, rural schools and power supplies for water pumping. More recently, the majority of our products have been used by on-grid customers as a clean, renewable source of alternative or supplemental electricity.

Product revenues. Product revenues consist of revenues from the sale of solar cells, panels and systems. We recognize revenue when persuasive evidence of an arrangement exists, shipment has occurred, the sales price is fixed or determinable and collectibility is probable. Product revenues represented 82% of total revenues for the period ended June 30, 2002 and 35% of total revenues for the period ended June 30, 2001. International product sales accounted for approximately 58% and 8% of total product revenues for the period ended June 30, 2002, and 2001, respectively. We anticipate that international sales will continue to account for a significant portion of our product revenues for the foreseeable future. Currently, all product revenues are denominated in United States dollars. Foreign exchange rate fluctuations have impacted the relative competitiveness of our products in other markets, but we have not had any direct foreign exchange exposure.

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Research revenues. Research revenues consist of revenues from various state and federal government agencies to fund our ongoing research, development, testing and enhancement of our products and manufacturing technology. We have not in the past, nor is it our intention in the future, to pursue contracts that are not part of our ongoing research activities. We recognize research revenues using the percentage of completion method.

Cost of product revenues. Cost of product revenues consists primarily of salaries and related personnel costs, materials expenses, depreciation expenses, maintenance, rent, royalties on licensed technology and other support expenses associated with the manufacture of our solar power products. We expect to continue to experience costs in excess of product revenues unless we are able to achieve greater manufacturing efficiencies, higher yields, and higher production levels.

Research and development expenses, including cost of research revenues. Research and development expenses, including cost of research revenues, consist primarily of salaries and related personnel costs, consulting expenses, and prototype costs related to the design, development, testing and enhancement of our products and manufacturing technology. We expense our research and development expenses as incurred. We believe that research and development is critical to our strategic objectives of enhancing our technology, reducing manufacturing costs and meeting the changing requirements of our customers. As a result, we expect that our total research and development expenses will increase in the future.

Selling, general and administrative expenses. Selling, general and administrative expenses consist primarily of salaries and related personnel costs, professional fees, rent, insurance and other sales expenses. We expect that selling expenses will increase substantially in absolute dollars as we increase our sales efforts, hire additional sales personnel and initiate additional marketing programs. We expect that general and administrative expenses will increase as we add personnel and incur additional costs related to the growth of our business.

Stock-based compensation expense. Through December 31, 2000, we recorded total cumulative deferred compensation of approximately $1.3 million representing the difference between the estimated fair market value of our common stock and the exercise price on the option grant date. These amounts were presented as a reduction of stockholders’ equity and are being amortized ratably over the vesting period of the options, which is generally four years. The amortization resulted in charges to operations of $143,000 and $149,000 for the three months ended June 30, 2002 and 2001, respectively.

Net interest income. Net interest income consists primarily of interest earned on the holding of short-term, high quality commercial paper, corporate bonds and United States government-backed securities, less any bond premium amortization.

COMPARISON OF THREE MONTHS ENDED JUNE 30, 2002 AND 2001

Revenues. Our product revenues for the three months ended June 30, 2002 were $1.1 million, an increase of $863,000, or 407%, from $212,000 for the same period in 2001. The increase in product revenues was due to the increased production capacity of our new manufacturing facility in Marlboro, Massachusetts, and our increased marketing and sales activities. Research revenues for the three months ended June 30, 2002 were $207,000, a decrease of $141,000, or 41%, from $348,000 for the same period in 2001. The decline in research revenues reflects reduced revenues received under our research contracts, as we were working on only one contract in the first half of 2002 as compared to two contracts for the same period in 2001.

Cost of product revenues. Our cost of product revenues for the three months ended June 30, 2002 was $2.8 million, an increase of $883,000, or 47%, from $1.9 million for the same period in 2001. This increase was associated with increased production at our Marlboro facility. Approximately 38% of the increase was due to higher depreciation expense resulting from equipment placed in service at our Marlboro manufacturing facility, 10% of the increase was due to increases in salary expense resulting from additional personnel, and 50% of the increase was caused by increases in materials purchased due to increased production.

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Research and development expenses, including cost of research revenues. Our research and development expenses, including cost of research revenues, for the three months ended June 30, 2002 were $958,000, an increase of $92,000, or 11%, from $866,000 for the same period in 2001. The increase was principally caused by increased spending on non-contract related research and development projects, somewhat offset by fewer costs incurred for our research contracts, as we were performing work on only one contract in the first half of 2002 as compared to two contracts for the same period in 2001.

Selling, general and administrative expenses. Our selling, general and administrative expenses for the three months ended June 30, 2002 were $1.2 million, an increase of $127,000, or 12%, from $1.0 million for the same period in 2001. Approximately 25% of the increase was due to increased employee related expenses resulting from additional personnel and increases in employee benefit costs and salary increases, 10% of the increase was due to increased insurance premiums, 35% of the increase was due to increased spending on advertising and other marketing programs, and the remainder of the increase was due to increased spending on information technology.

Stock-based compensation expense. Through December 31, 2000, we recorded total cumulative deferred compensation of approximately $1.3 million representing the difference between the estimated fair market value of our common stock and the exercise price on the option grant date. These amounts were presented as a reduction of stockholders’ equity and are being amortized ratably over the vesting period of the options, which is generally four years. The amortization resulted in charges to operations of $75,000 for the three months ended June 30, 2001 and $72,000 for the three months ended June 30, 2002. We expect to recognize total stock-based compensation expense for past grants of approximately $290,000 for each of the years ending December 31, 2002 and 2003, and $72,000 for the year ending December 31, 2004.

Our stock-based compensation expense for the three months ended June 30, 2002 was $72,000, a decrease of $3,000, or 4%, from the same period in 2001. The expense in the three months ended June 30, 2002 and 2001 was due to amortization relating to options granted in 1999 and 2000.

Net interest income. Our interest income for the three months ended June 30, 2002 was $210,000, a decrease of $269,000, or 56%, from $479,000 for the same period in 2001. The decrease in interest income was due to declining cash and investment balances resulting from capital equipment purchases and funding operations.

Other comprehensive loss. Our other comprehensive loss for the three months ended June 30, 2002 was $62,000, an increase in loss of $33,000 from the same period in 2001. For the three months ended June 30, 2002, our other comprehensive loss included unrealized gains and losses on marketable securities.

COMPARISON OF SIX MONTHS ENDED JUNE 30, 2002 AND 2001

Revenues. Our product revenues for the six months ended June 30, 2002 were $2.0 million, an increase of $1.6 million, or 455%, from $358,000 for the same period in 2001. The increase in product revenues was due to the increased production capacity of our new manufacturing facility in Marlboro, Massachusetts, and our increased marketing and sales activities. Research revenues for the six months ended June 30, 2002 were $443,000, a decrease of $236,000, or 35%, from $679,000 for the same period in 2001. The decline in research revenues reflects reduced revenues received under our research contracts, as we were working on only one contract in the first half of 2002 as compared to two contracts for the same period in 2001.

Cost of product revenues. Our cost of product revenues for the six months ended June 30, 2002 was $5.7 million, an increase of $2.3 million, or 70%, from $3.3 million for the same period in 2001. This increase was associated with increased production at our Marlboro facility. Approximately 33% of the increase was due to higher depreciation expense resulting from equipment placed in service at our Marlboro manufacturing facility, 15% of the increase was due to increases in salary expense resulting from additional personnel, 33% of the increase was caused by increases in materials purchased due to increased production, and the remainder of the increase was due to increases in other operating costs associated with increased manufacturing operations.

Research and development expenses, including cost of research revenues. Our research and development expenses, including cost of research revenues, for the six months ended June 30, 2002 were $1.8 million, an increase of $33,000, or 2%, from $1.7 million for the same period in 2001. The increase was principally

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caused by increased spending on non-contract related research and development projects, somewhat offset by fewer costs incurred for our research contracts, as we were performing work on only one contract in the first half of 2002 as compared to two contracts for the same period in 2001.

Selling, general and administrative expenses. Our selling, general and administrative expenses for the six months ended June 30, 2002 were $2.2 million, an increase of $53,000, or 3%, from $2.1 million for the same period in 2001. Approximately 18% of the increase was due to increased employee related expenses resulting from additional personnel, increases in employee benefit costs and salary increases, 12% of the increase was due to increased insurance premiums, 42% of the increase was due to increased spending on advertising and other marketing programs, and the remainder of the increase was due primarily to increased spending on information technology.

Stock-based compensation expense. Through December 31, 2000, we recorded total cumulative deferred compensation of approximately $1.3 million representing the difference between the estimated fair market value of our common stock and the exercise price on the option grant date. These amounts were presented as a reduction of stockholders’ equity and are being amortized ratably over the vesting period of the options, which is generally four years. The amortization resulted in charges to operations of $149,000 for the six months ended June 30, 2001 and $143,000 for the six months ended June 30, 2002. We expect to recognize total stock-based compensation expense for past grants of approximately $290,000 for each of the years ending December 31, 2002 and 2003, and $72,000 for the year ending December 31, 2004.

Our stock-based compensation expense for the six months ended June 30, 2002 was $143,000, a decrease of $6,000, or 4%, from the same period in 2001. The expense for the six months ended June 30, 2002 and 2001 was due to amortization relating to options granted in 1999 and 2000.

Net interest income. Our interest income for the six months ended June 30, 2002 was $452,000, a decrease of $666,000, or 60%, from $1.1 million for the same period in 2001. The decrease in interest income was due to declining cash and investment balances resulting from capital equipment purchases and funding operations.

Other comprehensive income. Our other comprehensive income for the six months ended June 30, 2002 was $93,000, representing no change from the same period in 2001. For the six months ended June 30, 2002, our other comprehensive income included unrealized gains and losses on marketable securities.

LIQUIDITY AND CAPITAL RESOURCES

We have historically financed our operations and met our capital expenditures requirements primarily through sales of our capital stock and, to a lesser extent, research revenues. At June 30, 2002, we had working capital of $20.1 million, including cash, cash equivalents and short-term investments of $18.0 million.

Net cash used in operating activities was $7.3 million for the six months ended June 30, 2002, as compared to $5.3 million for the six months ended June 30, 2001. The increase in net cash used in operating activities was primarily due to increases in our net loss and working capital assets associated with our inventory build up and increase in receivables due to higher sales. For the second quarter in 2002, Days Sales Outstanding (DSO) was approximately 92 days, versus approximately 60 days for the first quarter in 2002. The increase in DSO is attributed to extended credit terms given to customers. We believe these terms reflect industry practice, particularly in Europe and Asia.

Net cash provided by investing activities was $5.5 million for the six months ended June 30, 2002, as compared to net cashed used of $5.9 million for the six months ended June 30, 2001. Net cash was provided by selling short-term investments as required to fund operations and purchases of equipment since relocating to our Marlboro manufacturing facility. Net cash used in investing activities primarily represents capital expenditures, and also includes purchases, sales and maturities of high quality corporate paper, corporate bonds and United States government-backed obligations with contractual maturities typically less than one year.

Capital expenditures were $665,000 for the six months ended June 30, 2002, as compared to $7.5 million for the six months ended June 30, 2001. Capital expenditures for the six months ended June 30, 2002 were

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primarily for equipment needed for our manufacturing facility. As of June 30, 2002, our outstanding commitments for capital expenditures were approximately $500,000. Nearly all of our commitments for capital expenditures are associated with infrastructure improvements and equipment purchases for our manufacturing facility. We will fund our current capital commitments with the proceeds from our initial public offering, which closed in November 2000. In addition to the $665,000 of capital expenditures in the first half of 2002, we expect substantial further capital expenditures will be required to achieve the expected 8-megawatt capacity at our manufacturing facility.

Net cash provided by financing activities was $7,000 for the six months ended June 30, 2002, as compared to $805,000 for the six months ended June 30, 2001. The cash provided by financing activities represents proceeds from common stock shares issued under our Employee Stock Purchase Plan, and proceeds from the exercise of options and warrants to purchase common stock.

We believe our current cash, cash equivalents and short-term investments, will be sufficient to fund our current capital commitments and projected operating expenditures for approximately the next 12 months under current operations. The first of the Marlboro facility’s two manufacturing lines became operational in 2001. We recently began engineering and authorized capital expenditures for the equipment for the second manufacturing line, which we expect to become operational during 2003. We have also entered into agreements to purchase some of the longer-lead time equipment that will be used in our second manufacturing line. We anticipate that we will need to raise additional financing within the next 12 months to fund this expansion in order to achieve the expected 8-megawatt capacity and to fund further operating losses. In addition, we may need additional financing to execute our business plan sooner if we need to respond to business contingencies such as the need to enhance our operating infrastructure, respond to competitive pressures and acquire complementary businesses or necessary technologies. We do not know whether we will be able to raise additional financing or financing on terms favorable to us. If adequate funds are not available or are not available on acceptable terms, our ability to fund our operations, develop and expand our manufacturing operations and distribution network, or otherwise respond to competitive pressures would be significantly limited.

We currently do not have any special purpose entities or off-balance sheet financing arrangements. As of June 30, 2002, our cash commitments, as disclosed in Note 10 to our consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2001, have not significantly changed.

RECENT ACCOUNTING PRONOUNCEMENTS

In October 2001, the FASB issued SFAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets. The objectives of SFAS 144 are to address significant issues relating to the implementation of SFAS 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, and to develop a single accounting model, based on the framework established in SFAS 121, for long-lived assets to be disposed of by sale, whether previously held and used or newly acquired. SFAS 144 is effective for financial statements issued for fiscal years beginning after December 15, 2001 and, generally, its provisions are to be applied prospectively. To date, SFAS 144 has had no impact on our financial position or results of operations.

CERTAIN FACTORS WHICH MAY AFFECT FUTURE RESULTS

We caution readers that statements in this Quarterly Report on Form 10-Q that are not strictly historical statements, including, but not limited to: statements reflecting management’s expectations regarding the timing, cost, and success of the Company’s manufacturing scale-up at its new facility in Marlboro, Massachusetts and future manufacturing expansion and production, as well as related financing requirements; future financial performance; the Company’s technology and product development, cost and performance; the Company’s current and future strategic relationships and future market opportunities; and the Company’s other business and technology strategies and objectives, constitute forward-looking statements which are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements may be identified with such words as “we expect”, “we believe”, “we anticipate” or similar indications of future expectations. These statements are neither promises nor

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guarantees and involve risks and uncertainties which could cause our actual results to differ materially from such forward-looking statements. Such risks and uncertainties may include, among other things, those risks and uncertainties described below and in our other filings with the Securities and Exchange Commission, copies of which may be accessed through the SEC’s Web Site at http://www.sec.gov. We caution readers not to place undue reliance on any forward-looking statements contained in this Quarterly Report, which speak only as of the date of this Quarterly Report. We disclaim any obligation to publicly update or revise any such statements to reflect any change in our expectations, or events, conditions, or circumstances on which any such statements may be based, or that may affect the likelihood that actual results will differ from those set forth in such forward-looking statements.

RISKS RELATING TO OUR FINANCIAL RESULTS

You may have difficulty evaluating our business and prospects due to our limited operating history.

We are at an early stage of development and there is limited historical information available upon which you can base your evaluation of our business and prospects. We were formed in 1994 to research and develop crystalline silicon technology for use in manufacturing solar power products. Although we began shipping product from our pilot manufacturing facility in 1997, the primary objective of our pilot production line was the technical development and further refinement of our String Ribbon technology and related manufacturing processes. We shipped our first commercial products from our new Marlboro manufacturing facility in June 2001, andhave recognized limited revenues since our inception.

In addition, our earlier stage of development means that we have less insight into how market and technology trends may affect our business. The revenue and income potential of our business is unproven and the market we are addressing is rapidly evolving. You should consider our business and prospects in light of the risks, expenses and challenges that we will face as an early-stage company seeking to develop and manufacture new products in a growing and rapidly evolving market.

We have a history of losses, expect to incur substantial further losses and may not achieve or maintain profitability in the future, which may decrease the market value of our stock.

Since our inception, we have incurred significant net losses, including net losses of $6.9 million for the six- month period ended June 30, 2002. As a result of ongoing operating losses, we had a cumulative net loss of $35.1 million as of June 30, 2002. We expect to incur substantial losses for the foreseeable future, and may never become profitable. Even if we do achieve profitability, we may be unable to sustain or increase our profitability in the future, which could materially decrease the market value of our common stock. We expect to continue to incur significant capital expenditures and anticipate that our expenses will increase substantially in the foreseeable future as we seek to:

	•		Expand our manufacturing operations;
	•		Develop our distribution network;
	•		Continue to research and develop our products and manufacturing technologies;
	•		Implement internal systems and infrastructure in conjunction with our growth; and
	•		Hire additional personnel.

We do not know whether our revenues will grow at all or grow rapidly enough to absorb these expenses, and our limited operating history makes it difficult to assess the extent of these expenses or their impact on our operating results.

Our stock price could fall substantially if our quarterly revenue or operating results fluctuate or are disappointing. Furthermore, our stock price may be heavily influenced by factors in the broader stock market or by financial results of competitors and comparable companies in the energy technology sector.

Our quarterly revenue and operating results have fluctuated significantly in the past and may fluctuate significantly from quarter to quarter in the future due to a variety of factors, many of which are discussed elsewhere in this section.

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We anticipate that our operating expenses will continue to increase significantly. If sales in any quarter do not increase correspondingly, our net losses for that period will increase. For these reasons, quarter-to-quarter comparisons of our results of operations are not necessarily meaningful and you should not rely on results of operations in any particular quarter as an indication of future performance. If our quarterly revenue or results of operations fall below the expectations of investors or public market analysts in any quarter, the market value of our common stock would likely decrease, and may decrease rapidly and substantially.

RISKS RELATING TO OUR INDUSTRY, PRODUCTS AND OPERATIONS

If solar power technology is not suitable for widespread adoption or sufficient demand for solar power products does not develop or takes longer to develop than we anticipate, our sales would not significantly increase and we would be unable to achieve or sustain profitability.

The market for solar power products is emerging and rapidly evolving, and its future success is uncertain. If solar power technology proves unsuitable for widespread commercial deployment or if demand for solar power products fails to develop sufficiently, we would be unable to generate enough revenues to achieve and sustain profitability. In addition, demand for solar power products in the markets and geographic regions we target may not develop or may develop more slowly than we anticipate. Many factors will influence the widespread adoption of solar power technology and demand for solar power products, including:

	•		Cost-effectiveness of solar power technologies as compared with conventional and non-solar alternative energy technologies;
	•		Performance and reliability of solar power products as compared with conventional and non-solar alternative energy products;
	•		Success of alternative distributed generation technologies such as fuel cells, wind power and micro turbines;
	•		Fluctuations in economic and market conditions which impact the viability of conventional and non-solar alternative energy sources, such as increases or decreases in the prices of oil and other fossil fuels;
	•		Continued deregulation of the electric power industry and broader energy industry; and
	•		Availability of government subsidies and incentives.

We may fail to successfully develop our next generation solar power products under development, which would prevent us from achieving increased sales and market share.

Although we have been selling our solar power products since 1997, we expect to derive a substantial portion of our revenues from sales of our next generation solar power products which are under development and not yet commercially available. Many of these next generation products are derived from our innovative cell fabrication and advanced panel design technologies, which are under development. If we fail to successfully develop our next generation solar power products or technologies, we will likely be unable to recover the losses we will have incurred to develop these products and technologies and may be unable to increase our sales and market share and to become profitable. Much of our next generation product and manufacturing technologies are novel and represent a departure from conventional solar power technologies, and it is difficult to predict whether we will be successful in completing their development.In most cases, only limited pre-production prototypes of our next generation products have been field-tested.

Our solar power products may not gain market acceptance, which would prevent us from achieving increased sales and market share.

The development of a successful market for our solar power products may be adversely affected by a number of factors, many of which are beyond our control, including:

•

Our failure to produce solar power products that compete favorably against other solar power products on the basis of cost, quality or performance;

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	•		Our failure to produce solar power products that compete favorably against conventional energy sources and alternative distributed generation technologies, such as fuel cells, on the basis of cost, quality or performance;
	•		Whether customers accept the thin polymer-frame design of our next generation solar panels and the new techniques we are developing to mount them; and
	•		Our failure to develop and maintain successful relationships with distributors, systems integrators and other resellers, as well as strategic partners such as Kawasaki Heavy Industries.

If our solar power products fail to gain market acceptance, we would be unable to increase our sales and market share and to achieve and sustain profitability.

Technological changes in the solar power industry could render our solar power products obsolete, which could reduce our market share and cause our sales to decline.

Our failure to further refine our technology and develop and introduce new solar power products could cause our products to become obsolete, which could reduce our market share and cause our sales to decline. The solar power industry is rapidly evolving and competitive. We will need to invest significant financial resources in research and development to keep pace with technological advances in the solar power industry and to effectively comp